A business is all about investment and the return on investment (ROI). The primary motivator of any business is capital. The more capital a business has access to the more the market penetration, innovation, and the capacity to leverage competitive advantage in the ever-growing global market.
Whatever the brand may be, the aim of any startup is to become a household name and if possible enjoy a relative monopoly. No founder if given the opportunity likes to have people breathing down the neck and prefers at all the time to dictate the tune.
The mitigating factor that enhances all these, however, is the availability of capital. For most startups, sourcing the capital to embark on all the lofty ideas is a herculean task. Banks that have such funds in their vaults usually attach very stringent conditions to the disbursement of such funds.
Founders and CEOs have ended up going cap-in-hand to banks and other financial institutions, with a sizeable number of them coming back with little or nothing. A survey carried out on startups in 2016 reported that 28 percent that sought for financing was not approved, while 41 percent received some funds but not all they sought for.
The advent of Venture Capitalists (VCs) and Angel Investors (AIs) brought a great relief to startups. AIs which may include professionals such as doctors, lawyers, engineers, suppliers, customers, and even other entrepreneurs are quite different from the VCs.
Some AIs are more motivated by the joy they derive in helping your young startup to succeed and not solely on the profit that will accrue from their investment at the end of the day. But with either the VCs or AIs, the processes you have to go through before securing your funds are a far cry from what you get from banks and other traditional financial institutions.
The VCs are made up of limited partners and general partners. While the AIs provide personal equity and take shares in your business, the general partners work directly with your startup to ensure that it’s developing. They practically get involved in the day-to-day running of your business.
The catch, however, is that AIs usually have limited source of funding and the VCs who have large sums of funds are always skeptical about investing in startups because of the risks involved.
Where your startup succeeds in getting funded, expectedly, the VCs with their funds will mount great pressure and you may have to be at their beck and call. They are always close by to monitor how their funds are being utilized and to what purpose or end.
The launching of cryptocurrencies, however, introduced another angle into the funding of startups. This was facilitated with the coming on stream of ICO investors as compared to traditional VCs.
A report from Statista says that the Bitcoin market capitalization increased from approximately 0.04 billion U.S. dollars in the first quarter of 2012 to approximately 237.62 billion U.S. dollars in the fourth quarter of 2017.
Startups were gingered and they went all headlong. They raised funding by creating and even selling their own coins/tokens instead of the traditional method of selling equity. The resultant effect of this was that companies, where VCs have been operating in their environment, have unhindered access to growth capital, thereby creating a whole lot avalanche of challenges to VCs.
Two practical examples were Ripple, whose XRP token can be used to execute cross-border payments, and Fatcom, whose Factoid token can be used to pay for time-stamped database entries that are hashed onto the Bitcoin blockchain’s immutable ledger.
VCs seem to have virtually lost the control and governance they had on how startups plan to spend the money with initial coin offerings (ICOs). The case is further compounded by the fact that established investment firms are now adopting cryptocurrency as a legitimate asset class, which is fueling additional growth, and more importantly, credibility, for the industry.
William Mougayar, the author of ‘The Business Blockchain’ says that “The decentralization effects of blockchain-based cryptocurrencies are hitting the venture capital industry in more ways than one, Whereas, the traditional venture capital industry is boring, the crypto-tech industry has become more exciting.”
A very significant and obvious thing the crypto-tech industry has going for it is that where the venture capital industry is a closed market that is dominated and controlled by a few rich people, it is, on the other hand, a wide-open global market, where all comers play their roles with profits and losses equitably distributed.
The Financial Times caps it all in ‘Cryptocurrency Boom Upends Venture Capital’ with the report that, “This is a boom that should terrify venture capitalists. It has exposed shortcomings in both their funding and their worldview. They were the ringmasters of the dotcoms: Sequoia and Kleiner Perkins were the only firms to put money into Google – a mere $25M – and rode it all the way to the top. Now, they are jostling for allocations like everyone else.”